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Precious Metal ETFs Resume Slide

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Precious Metal ETFs Resume Slide
Source: The Guardian (U.K.) Source: The Guardian (U.K.)

There has been quite a bit of action in the paper markets for the precious metals as we wind down the fourth quarter of 2015. This encompasses the trading of COMEX futures for gold, silver, platinum and palladium, as well as exchange-traded funds (ETFs) tied to the various precious metals.

Balancing Act

The "paper gold" markets play a significant role in driving current prices. The only problem is that they don't always reflect the true supply and demand for the metals, which are normally the main drivers for any market price. Instead, investor sentiment and the proportions of speculative positions weigh heavily on spot prices. The movement in the ETF and COMEX futures markets confirms this.

generic-gold-barsThere could be some encouraging news for the gold market from a technical perspective. The underlying demand dynamics do remain strong. After a sporadic first half of the year in terms of gold imports to India and China (the world's two largest consumers of gold), buying has begun to pick up in those markets. Spot prices consistently below $1,100 per ounce have spurred some added purchases, and the World Gold Council (WGC) still projects between 900 and 1,000 tonnes of aggregate gold demand from India by year's end.

At the same time, silver demand has been strong in the East as an alternative to gold, especially as spot prices have fallen below $14 per ounce.

Leveraging Hits All-Time High

There are some interesting conclusions to glean from the net bullish and bearish positions on the COMEX markets. It's important to keep in mind that the demand for gold mentioned above has been obscured by the paper markets, where there are 325 claims or contracts for every 1 ounce of actual gold held in COMEX vaults. (This ratio just keeps getting higher.) This sort of leveraging means that futures trading has a disproportionate influence on prices for the actual (physical) precious metals.

NYfed-vault-Fed-Reserve-PhotoYet, a development worth watching concerns the net trader positions building up: the short positions on gold have been piling up lately as hedge funds increasingly bet that prices will continue to fall. This short on gold has grown three times in size over the last six weeks alone, which supposedly represents extreme bearish sentiment for gold. At the same time, a sizeable long position (a bet the price will rise) is being established on the other side of the bet by large bullion banks.

As these two speculative positions continue to pile up, it usually indicates that price action is set to make a sharp move—a "breaking point"—because so many contracts are on the line. As you might expect, the bullion banks virtually never lose these kinds of bets; their judgments in the futures markets about where the metals prices are going have been remarkably accurate over the years. Although no one can tell for sure, this could set the stage for a surprising reversal in price trends in the near future.

Leading Gold ETFs

On Thursday, two of the main gold-backed ETFs were lower in afternoon trading. The SPDR Gold Trust ETF (NYSE:GLD), the largest of its kind with a market capitalization near $22 billion, fell about 2% on Thursday. It did, however, remain above $100 per share for the time being. GLD had added 1.2% during the previous trading day that saw the Fed decide to hike rates.

GLD five-day price chart. Source: Google Finance GLD five-day price chart. Source: Google Finance

One of its formerly large counterparts, the Direxion Shares ETF Trust (NYSE:NUGT) that tracks gold miners, did not fare as well. The fund was down more than 15% on Thursday alone, treading water above $22 per share. Just 6 months ago, this ETF was near $1,000/share.

NUGT six-month price chart. Source: Google Finance NUGT six-month price chart. Source: Google Finance

Support for Palladium ETF (NYSE:PALL)

Sometimes silver and the Platinum Group Metals (PGMs) are also influenced by developments in certain industries. Palladium, for example, has recently been driven higher by strong automobile sales (in Europe especially), as the precious metal is used in emissions-reducing catalytic converters. A staggering two-thirds of the annual palladium supply around the globe is used by the auto industry.

Still, one of the main palladium ETFs, the ETFS Pysical Palladium Shares (NYSE:PALL), was down 2% on Thursday, falling just below $54 per share. It has fallen more than 30% through 2015. The fund remains 5.9% above its recent low to start December, however.

PALL one-month price chart. Source: Google Finance PALL one-month price chart. Source: Google Finance

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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